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Sandeep Baliga is a Professor of Managerial Economics and Decision Sciences in the MEDS Department at the Kellogg School of Management, Northwestern University. Professor Baliga uses game theory and the theory of incentives to study fundamental issues in economics and political science.

He has studied how power and authority should be delegated within organizations to incentivize effort and innovation. He is currently studying the make or buy decision: when should an activity be performed within a firm and when should it be subcontracted out?

In political science, Professor Baliga has studied the strategic logic of terrorism, whether democracies are less likely to go to war than other regime types, when communication can help reduce conflict, and the impact of strategic ambiguity of weapons stockpiles on arms proliferation. He is currently studying how the strategic nature of conflict changes with the technology of war.

Professor Baliga read Economics at St. John's College, Cambridge University and received his PhD in Economics from Harvard University. He has been on sabbatical at the Institute of Advanced Study in Princeton, Boston University, MIT and, most recently, Harvard. He was a Fulbright Scholar and an invited Fellow at the Center for Advanced Studies in the Behavioral Sciences at Stanford University.

Professor Baliga teaches Managerial Economics, Competitive Strategy and Industrial Structure, and Leadership and Crisis Management at the MBA level and "Conflict and Cooperation" at the PhD level.

Baliga was the Managing Editor of the Berkeley Electronic Press Journals in Theoretical Economics and Associate Editor of the European Economic Review. He has published in top journals including the American Economic Review, Journal of Economic Theory, Journal of Political Economy, RAND Journal of Economics, Review of Economic Studies and the Review of Financial Studies.

He blogs at Cheap Talk and is the co-creater of Purple Pricing, an innovative auction method that is being used by Northwestern University to sell football and basketball tickets. He has started a consulting company with two partners to commercialize these ideas. In his spare time, Professor Baliga likes going to concerts and the theatre. But in practice he is fully employed driving his son to hockey games.

Two players choose hawkish or dovish actions in a conflict game with incomplete information. An extremist, who can either be a hawk or a dove, attempts to manipulate decision making. If actions are strategic complements, a hawkish extremist increases the likelihood of conflict, and reduces welfare, by sending a public message which triggers hawkish behavior from both players. If actions are strategic substitutes, a dovish extremist instead sends a public message which causes one player to become more dovish and the other more hawkish. A hawkish (dovish) extremist is unable to manipulate decision making if actions are strategic substitutes (complements).

We offer a theory of the sunk cost fallacy as an optimal response to limited memory. As new information arrives, a decision-maker may not remember all the reasons he began a project. The sunk cost gives additional information about future profits and informs subsequent decisions. The Concorde effect makes the investor more eager to complete projects when sunk costs are high and the pro-rata effect makes the investor less eager. In a controlled experiment we had subjects play a simple version of the model. In a baseline treatment subjects exhibit the pro-rata bias. When we induce memory constraints the effect reverses and the subjects exhibit the Concorde bias.

Baliga, Sandeep, David Lucca and Tomas Sjostrom. 2011. Domestic Political Survival and International Conflict: Is Democracy Good for Peace?. Review of Economic Studies. 78(2): 458-486.

We build a game-theoretic model where aggression can be triggered by domestic political concernsas well as the fear of being attacked. In the model, leaders of full and limited democracies risk losing power if they do not stand up to threats from abroad. In addition, the leader of a fully democratic country loses the support of the median voter if he attacks a non-hostile country. The result is a non-monotonic relationship between democracy and peace. Using Polity data, we classify countries as full democracies, limited democracies, and dictatorships. For the period 1816 - 2000, Correlates of War data suggest that limited democracies are more aggressive than other regime types, including dictatorships, and not only during periods when the political regime is changing. In particular, a dyad of limited democracies is more likely to be involved in a militarized dispute than any other dyad (including mixed dvads, where the two countries have different regime types). Thus, while full democratization might advance the cause of peace, limited democratization might advance the cause of war. We also find that as the environment becomes more hostile, fully democratic countries become more aggressive faster than other regime types.

Compensation contracts have been criticized for encouraging managers to manipulate information. This includes bonus schemes that encourage earnings smoothing, and option packages that allow managers to cash out early when the ?rm is overvalued. We show that the intransparency induced by these contract features is critical for giving long-term incentives. Lack of transparency makes it harder for the owner to engage in ex post optimal but ex ante inef?cient liquidity provision to the manager. For the same reason, it is often optimal to pay for luck (i.e., tie long-term compensation to variables that the manager has no influence over, but may have private information about, such as future profitability of the whole industry)

In the bilateral hold-up model and the moral hazard in teams model, introducing a third party allows implementation of the first-best outcome, even if the agents can renegotiate inefficient outcomes and collude. Fines paid to the third party provide incentives for truth-telling and first-best levels of investment. Our results suggest that models that provide foundations for hold-up and incomplete contracts by invoking renegotiation are sensitive to the introduction of third parties.

A big country is facing a small country that may have developed weapons of mass destruction. The small country can create strategic ambiguity by not allowing arms inspections. We study the impact of strategic ambiguity on arms proliferation and the probability of conflict. We find that creating strategic ambiguity is a substitute for actually acquiring new weapons: behind the veil of ambiguity, there is less incentive for the small country to invest in a weapons program. Therefore, strategic ambiguity reduces the risk of arms proliferation. On the other hand, strategic ambiguity may hurt the small country because it does not always protect it from an attack. We allow cheap-talk, and find that messages can be used to trigger inspections when they are most valuable to the big country. To preserve incentive compatibility, the "tough" messages which make inspections more likely must also imply a greater risk of arms proliferation.

Psychological and experimental evidence, as well as a wealth of anecdotal examples, suggests that firms may confound fixed, sunk and variable costs, leading to distorted pricing decisions. This paper investigates the extent to which market forces and learning eventually eliminate these distortions. We envision firms that experiment with cost methodologies that are consistent with real-world accounting practices, including ones that confuse the relevance of variable, fixed, and sunk costs to pricing decisions. Firms follow "naive" adaptive learning to adjust prices and reinforcement learning to modify their costing methodologies. Costing and pricing practices that increase profits are reinforced. In some market structures, but not in others, this process of reinforcement causes pricing practices of all firms to systematically depart from standard equilibrium predictions.

Two players simultaneously decide whether or not to acquire new weapons in an arms race game. Each player's type determines his propensity to arm. Types are private information, and are independently drawn from a continuous distribution. With probability close to one, the best outcome for each player is for neither to acquire new weapons (although each prefers to acquire new weapons if he thinks the opponent will). There is a small probability that a player is a dominant strategy type who always prefers to acquire new weapons. We find conditions under which the unique Bayesian Nash equilibrium involves an arms race with probability one. However, if the probability that a player is a dominant strategy type is sufficiently small, then there is an equilibrium of the cheap-talk extension of the game where the probability of an arms race is close to zero.

Baliga, Sandeep and Ben Polak. 2004. The Emergence and Persistence of German and Anglo-Saxon Financial Systems. Review of Financial Studies. 17(1): 129-163.

We study trading models when the distribution of signals such as costs or values is not known to traders or the mechanism designer when the profit-maximizing trading procedure is designed. We present adaptive mechanisms that simultaneously elicit this information (market research) while maintaining incentive compatibility and maximizing profits when the set of traders is large (market design). First, we study a monopoly pricing model where neither the seller nor the buyers know the distribution of values. Second, we study a model with a broker intermediating trade between a large number of buyers and sellers with private information about their valuations and costs. We show that when the set of traders becomes large our adaptive mechanisms achieve the same expected profits for the monopolist and the broker as when the distribution of signals is common knowledge.

We study a multilateral negotiation procedure that allows for "partial agreements" in which responders are told only their own shares. Applications of our model include negotiations under "joint and several liability." Unlike previous models of multilateral bargaining with exit, we find that there are multiple equilibrium outcomes.

Baliga, Sandeep and Robert Evans. 2000. Renegotiation in Repeated Games with Side-Payments. Games and Economic Behavior. 33(2): 159-176.

Baliga, Sandeep and Tomas Sjostrom. Forthcoming. "The Hobbesian Trap." In Oxford Handbook of the Economics of Peace and Conflict, edited by Michelle Garfinkel and Stergios Skaperdas, Oxford: Oxford University Press.

We consider a cheap-talk game with one sender and one receiver. If the receiver does not commit to listen to only one message, the equilibrium refinements due to Farrell [5], Grossman and Perry [7] and Matthews, Okuno- Fujiwara and Postlewaite [11] are no longer applicable. We discuss different notions of durability and sequential credibility when a message can later be followed by more messages, and both parties know this.

Since 1981, the U.S. federal government has operated a price support program to help sugar beet and sugar cane producers and processors. This complex program works through a combination of loans, import quotas, and duties. As a result, sugar prices in the United States are significantly higher than world prices. For example, in December 2001, U.S. consumers paid 22.9 cents per pound, while the world price was just 9 cents per pound. The General Accounting Office estimates that the total cost to consumers is $1.9 billion a year. This case uses a simple demand-and-supply framework, using real-world data, to assess the economic and political consequences of the U.S. sugar program. The case provides students with a vivid, fact-based illustration of welfare concepts such as consumer surplus, producer surplus, and dead-weight loss in a concrete, real-world market context.

This case studies the impact of tariffs, subsidies, and quotas on the U.S. steel market. It pays particular attention to "winners" and "losers" from different policies. The impact of these policies is illustrated via applications to the events in the U.S. steel market in 2001.

Leadership and Crisis Management (KPPI-440-5)This course was formerly known as KPPI 440-AIn recent decades corporations have increasingly become the dominant source for political and social change. Increased globalization and technological progress have further accelerated this process. Businesses are now held accountable by standards other than legal compliance or financial performance. Successful business leaders have recognized that these challenges are best mastered by a commitment to values-based management. However, simply "doing the right thing" is not enough. Rather, companies increasingly find themselves as targets of aggressive legal action, media coverage and social pressure. Organizations must be prepared to handle rapidly changing environments and anticipate potential threats. This requires a deep understanding of the strategic complexities in managing various stakeholders and constituencies. To confront students with these challenges in a realistic fashion, the class is structured around a rich set of challenging case studies and crisis simulation exercises.
Spring 2017 Chicago Campus Section 71 will meet on the following dates:
Fri 04/07/2017 6:00 PM - 9:00 PM
Sat 04/08/2017 9:00 AM - 4:00 PM
Fri 04/21/2017 6:00 PM - 9:00 PM
Sat 04/22/2017 9:00 AM - 12:00 PM

Political Economy II: Conflict and Cooperation (MECS-540-2) This course will offer a mainly theoretical treatment of conflict. Strategic interaction within and across nations involves conflict and cooperation. Disagreement between a country's population and its leadership can cause internal conflict, oppression and terrorism. Disagreement between countries can lead to war, costly arms races and impede economic development. Conflict often arises even though there is some cooperative solution that would have satisfied all the relevant actors. We will study the fundamental causes of conflict (positive analysis) and possible solutions that create incentive-compatible cooperation (normative analysis). Specific topics include: guns vs butter models of conflict and arms races caused by greed, conflict created by mutual uncertainty of motives, democratic peace, terrorism, slippery slope arguments for pre-emption and wars of attrition.

Executive MBA

Economics of Competition (MECNX-441-0) Economics of Competition prepares students to diagnose the determinants of an industry’s structure and formulate rational, competitive strategies for coping with that structure.